| By: GEORGE CHAMBERLIN - For the North County Times
Suze Orman made a surprising announcement last week. No, not that announcement. Rather, the Martha Stewart of personal finance disclosed that most of her money is invested in tax-free municipal bonds.
The confession came in an interview with Larry King. She was on his program to discuss the big sell-off in stocks that clipped the markets on Tuesday.
Appropriately, she suggested that individual investors should not let a modest 3 percent decline in the major market barometers divert them from their long-term goals.
However, when prodded by King about her own personal investments, Orman said that she has the bulk of her funds in zero coupon municipal bonds. Since she lives here in California, I would assume that most of her bonds are issued by agencies within the state. That means the interest is free of both state and federal income taxes.
Kudos to Suze. While I am not a big fan of bonds, I have long considered zero coupon munis to be an under-used retirement planning tool.
The concept, like most of the best investments, is very simple. Zeros are like savings bonds. You invest a certain amount of money today and, at a determined point in time down the road, will get back a bigger sum of money. The difference between what you invest and what you get at maturity is completely tax-free.
The term "zero" is a reference to the assigned interest rate on the bond.
These investments generate no cash flow over their life; rather, the pay day comes when the bond matures.
I checked with a local financial adviser and came up with an example of a typical zero coupon municipal bond. It comes from one of the Fallbrook school districts and carries an AAA rating. A bond with a face value of $10,000 sells for a current price of $4,212. That means that, at maturity in 2027, the investor will pocket $5,788 that is completely tax-free.
That works out to a simple yield of about 4.3 percent. But when you factor in that the return is exempt from any income taxes, it works out to a comparable yield of nearly 8 percent for an investor in the top tax bracket.
By the way, the AAA rating is important. It is the result of private insurance on the bond that guarantees that investors will get paid even if there is a financial or natural disaster that would jeopardize the ability of the district to meet its obligation.
Very few advisers recommend zero coupon municipal bonds to their clients. Has your broker ever made such a suggestion? That's a real shame, because they are exceptional retirement planning tools. For a person who has made the maximum contribution to their 401(k) or other plans, zeros make a whole lot more sense than variable annuities or other high-commission products.
Stacking zero coupon bonds is a great tool. Having one of these bonds mature each year in retirement is a great complement to other nest eggs. Like any other quality investment, a small amount invested responsibly today will pay off handsomely in the future. George Chamberlin is a regular contributor to the North County Times, and also is a TV and radio commentator.
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